Is It Time To Start Nibbling At Gold?

11/03/14 05:25:14 PM

by Koos van der Merwe

Former Federal Reserve Chairman Alan Greenspan has said, "buy gold."

Security: GLDL, DJI, SPX
Position: Sell

Former Federal Reserve Chairman Alan Greenspan said he doesn't think the Fed can unwind years of extraordinary stimulus without causing turmoil in financial markets. The Federal Open Market Committee announced the end of bond purchases, finishing its third round of quantitative easing. While the Fed's bond-buying program has been a "terrific success" in boosting asset prices, it hasn't galvanized effective demand in the real economy, Greenspan said. He sees turmoil ahead and has advised investors to "buy gold" as a protection against a market he sees falling. How correct is he? He is well known for his "irrational exuberance" speech and for shooting from the hip to correct market faults.

Figure 1. Monthly Chart Of Dow Jones Industrial Average (DJIA). Here you see the DJIA's performance during Alan Greenspan's term.

Graphic provided by: AdvancedGET.

The chart in Figure 1 is a monthly chart of the Dow Jones Industrial Average (DJIA) showing Greenspan's term of office. His first challenge was the October 1987 crash, and he quickly solved that problem and the market started rising strongly to a high in July 2000. Then came the technology crash into October 2002. Once again his easy money policies revived the market and when he resigned in January 2006, the DJIA was rising into the subprime mortgage crises, a crises that his easy money policies created; a crises he left to Ben Bernanke to solve. On October 27, 2014 he stated in an interview with Avel Merk, President & CIO of Merk Investments, "price of Gold will rise," measurably over the next five years.

Figure 2. London Gold. The price chart of London gold is showing a triple bottom.

Graphic provided by: AdvancedGET.

A look at the London gold price in Figure 2 shows that the London gold price has formed a triple bottom at $1195.33. A triple bottom is a strong support level, suggesting that gold prices should start moving higher. However, should the price penetrate the triple bottom support downwards, this is considered bad news, with the fall expected to continue some way. With the London gold price presently at $1202, and trending downward, support could be found for a fourth time at $1195.33. However, should the price fall below this level, then for the short-term, Alan Greenspan could be wrong. Note the relative strength index (RSI) which could be trending down after giving a sell signal on February 14, 2014.

Figure 3. A Trumpet. A trumpet pattern suggests uncertainty ahead.

Graphic provided by: AdvancedGET.

Take a look at the DJIA in Figure 3. The daily chart is suggesting that a trumpet pattern has formed. A trumpet pattern formation suggests uncertainty. The market on a whole is not certain where it is going. The RSI shown suggests that the present trend is up, and that the DJIA could test 17558.78. What happens then is uncertain. Will the DJIA continue rising or will it start falling? Is this the reason for Alan Greenspan's remarks?

Figure 4. Elliott And Gann. Elliott waves and Gann fans on this monthly chart of the S&P 500 suggests that a strong correction is due in the index.

Graphic provided by: AdvancedGET.

Many analysts today feel that the DJIA no longer reflects the trend of the market. However, when I look at a monthly chart of the S&P500 index, with Gann fans, as shown in Figure 4, the chart suggests that a strong correction is due, with the S&P500 index falling from its present level to probably the 1873.53 level. Elliott Wave analysis suggests that this will be a WAVE IV correction with the S&P 500 index rising strongly in a WAVE V. The RSI(14) is at overbought levels, but has not suggested a sell and neither has the MACD indicator.

When the economy faults, gold is considered a safe haven. The stock market is not the economy, but at market highs, the market usually trails the economy as inexperienced investors put money into the market at highs. Alan Greenspan looks at the economy, not the market. He is seeing what we, the stock market analysts, do not see. Listening to what he says and believes is always an advantage, so following his advice, maybe it's time to start nibbling at gold.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.